The MiFID Checklist. Are you ready? Better yet, is your vendor?
Who should pay attention to the MiFID checklist? Has someone asked you about MiFID? Has someone said that in 2007 MiFID is something that you need to concentrate on? Have you asked yourself, what is MiFID and what am I supposed to do about it? If the answer is yes, you should read and study this checklist.
Q: What are some common mistakes with MiFID implementation plans that you've seencompanies make?
A: Waiting. Banks should not wait and procrastinate until they feel that they have a completesolution. Firms should break the problem down piece-by- piece, that's what we've tried todo here.
Q: What do you think regulators should be doing differently?
A: At first, regulators did not have a good two-way dialogue with the organizations that will beaffected by MiFID. Now they seem to be including organizations in the decision makingprocess and incorporating feedback a bit better. Some of the initial guidance was notpractical. Regulators need to continue to consult the industry.
Q: What work went on in creating the checklist?
A: It's our general approach for major industry initiatives to try to stay well ahead of theindustry and ahead of our customers' needs. We began researching the regulation as soonas information began flowing. In addition, we've hosted and sponsored events to bring people together to discuss the topic, in addition to attending many other events to discuss itwith the banks themselves. And, in general, we spend a great deal of time with ourcustomers talking about big challenges that are coming and how we should be moving oursolutions to accommodate such change. MiFID's only a short time a way.
Q: What should companies be doing at this moment?
A: Again, it's about advanced planning. European banks need to put plans in place startingnow - getting the right minds focused on the problem in a way that is specific to the bankand how it works. Remember, regulators speak in generalities and don't care how you dobusiness or the impact regulations have on your bottom line.The industry has accepted that there will not be a last-minute deferral from the EC.
Q: Will they be ready?
A: We believe that the industry participants on the sell-side will be ready for MiFID by November 2007, and will not be counting on a last minute deferral. None of the big players wants the bad press that would come from not being ready for MiFID. Some smaller buy-side organizations may struggle a bit more, but we believe they have an equal chance of being ready if they follow the correct advice and get help along the way.However, there is certain to be a last minute flurry to comply - this is always the case with any significant regulation.
Q: Do you think principles are the correct way to implement and police this directive?
A: A directive requires transposition and therefore could be interpreted differently. Apparently the level 2 measures are treated both as directive and regulation. For example, best execution & client order handling is a directive, while pre-trade transparency will be regulation. We think it's useful to allow for some degree of interpretation, so that there is flexibility in the implementation - provided it doesn't create inequity among the players.
The MiFID Readiness Checklist
As the MiFID compliance date of November 2007 approaches, financial institutions must closely consider their business lines and the accompanying costs of complying, as well as the potential opportunities to pick up business and move into areas created by the advent of the regulations.
For starters, in order to get ready for MiFID, firms need to:
The Checklist
1. Client Classification - You need to classify your clients as retail, professional, or eligible. The level of classification will depend on the client.
Systems impact: Changes to systems may be required to treat clients differently based onthese new classifications.
2. Information About the Firm and Its Services - you'll need to determine what type and how much information must be provided to clients and its service changes under MiFID.
Systems impact: Additional information will need to be captured or disseminated at varioustimes during the client relationship.
3. Suitability and Know Your Customer -- Know Your Customer will apply to both retail and professional clients. You will also need to ensure suitable recommendations are given andinvestment management decisions made based on this information.
Systems impact: Procedures for capturing and recording 'know your client' information willchange and therefore changes to existing systems or new systems will be required.
4. Appropriateness and Execution-Only Services - Execution-only services can only be provided for non-complex instruments where the client has initiated the service and the firm has advised that suitability has not been assessed.
Systems Impact: Trading systems will need to be able to indicate execution only and whether appropriateness has been assessed. Operational control over these cases is required.
5. Best Execution - Obliges investment firms to take all reasonable steps to obtain the best possible result when executing order on the behalf of clients.
Systems Impact: Data needs to be collected from the point of making trading decisions thatwill support the best execution policy. Data related to executions will also be requireddownstream and will need to be stored.
6. Client Order Handling - A new requirement is to make public client limit orders that are not immediately executed.
Systems Impact: A review of systems and processes is required to ensure that therequirements are being met. Publishing client limit orders that are not immediately executedcould be an enhancement to existing systems or require a new system.
7. Reporting Information to Clients - Flexibility and timing of reporting of information on the services provided to clients is changing.
Systems Impact: Systems need to be reviewed to ensure that the content and frequency ofreporting to clients meets the MiFID requirements.
8. Markets and Transparency - Pre-trade transparency requirements become more stringent.
Systems Impact: Trading systems will need to change to comply with transparency rules.Continuous quotes are required in the case of a systematic internalizer.
9. Markets and Transparency - Post-trade details are required to be published on a real-time basis.
Systems Impact: The disclosure of post trade details needs to be catered for in systemsincluding having the required infrastructure to be able to report in real-time.
10. Cross Border Branching and Passporting - MiFID extends the range of activities that a firm can participate in without having separate authorizations.
Systems Impact: Systems that cater for these products will need to be rolled out to additionallocations.
ConclusionWhile it's complex and might feel amorphous, MiFID can be tamed through careful planning and precise execution. In the final analysis, only certain functional areas are affected and certain teams within your organization. The key is to focus efforts around only those core areas, articulate clear plans, form alliances with top vendors and consultants to get systems and workflows in place, and don't wait - begin now!
With the right solutions in place, the smartest firms will find a way to exploit this new regulatory scrutiny to enhance their businesses and increase profits for their clients, and as a result for themselves.
About Iris Financial Solutions
Iris Financial Solutions provides configurable software solutions to the front- and middle-offices of the world's tier 1 securities firms in the core markets of trading, portfolio and position management, trade processing, and risk management. Iris has offices in New York, London, San Francisco, and Tokyo.
www.irisfinancialsolutions.com
